What International Companies Need to Know About Payroll and Payroll Services in China:
Compensation, benefits and payroll is a critical aspect of operating a business that is a major consumption of time and money, even when you understand how the system works and what to expect. However, China’s system differs greatly from other payroll systems in the world. To understand the laws, regulations and customs related to the service, many international companies operating in China hire a payroll service provider to handle their needs. Using a payroll service provider in China will likely save your company time and money, help you avoid fines or worse, and make sure you are in compliance with all Chinese laws and regulations.
Understanding Salary Components & Labor Laws in China
Chinese labor laws differ from other countries. They have a strict zero-tolerance policy towards discrimination in the labor market and authorities have been known to impose large fines and, in some cases, even revocation of a company’s business license. Therefore, regardless of gender, race and religion, employers must pay all employees at the same corporate level with a comparable salary.
Any company operating in China must pay employees severance according to the local laws and regulations. Severance pay in China is complicated and is typically due unless the employer can show that the employee has violated the laws and regulations as explained in the Chinese Labor Agreement or Employee Handbook signed between the employer and employee. If the employee’s contract comes to an end and the company does not wish to renew it, the company is also obligated to pay the employee severance typically of one month’s salary for each year that the employee has completed.
Bonus and 13th Month Salary
While bonuses may not be legally required by the Chinese government, it is largely expected by employees in China that they will receive a 13th month salary as a bonus before the Chinese New Year holiday. This shows how the payroll process can be complicated due not only to laws but also to local culture and customs.
China has an extremely complicated tax system, including individual income tax (IIT) paid by employees only, additional itemized deductions, and several social security payments, the regulation of which differs from city to city. These social security insurance rates have maximum and minimum contributions based on the employee’s salary and change yearly. The employer’s responsibility varies on an individual case basis, and the laws change each year, making the accurate payment of taxes in China extremely time consuming. Employers must calculate the appropriate rate of employer contribution in their city for social insurance contributions, including Pension Insurance, Medical Insurance, Unemployment Insurance, Work-Injury Insurance, Maternity Leave Insurance, and a Housing Fund. Further attention must be paid to tax rates for foreigners in China. Since 1st January 2019, individual income tax is calculated based on an annual accumulative basis, making it difficult to estimate. As such, navigating the Chinese tax system is not something you should do without an experienced professional who has local expertise.
We have provided a visual breakdown of a Chinese salary slip to assist you in better understanding the taxes, deductions, and contributions that go with payroll:
Annual Leave and Public Holidays in China
Another consideration of payroll is the local holidays and leave entitlement. The Chinese government has several mandated public holidays, and they often create new holiday arrangements at short notice, which can create a complicated process for administering time off. Further consideration should be made for giving employees time off during non-Chinese holidays. Additionally, Chinese workers are provided with anywhere from 5 to 15 days off every year as paid annual leave, based on a sliding scale of the employee’s length of time employed by the company since they graduated from their studies.
To conclude, payroll processes in China are highly complicated, where related policies change often and non-compliance with such regulations can carry strict penalties. Many foreign companies entrust a specialized company to carry out their payroll services in order to minimize risk and create a stable foundation to grow their businesses in China.
PTL Group provides comprehensive HR management services throughout the entire employee lifecycle process, in order to establish both the employee and employer’s confidence as a starting-point for sustainable success.
- If you have a business entity in China – we will provide you with all the necessary HR functions to manage your staffing needs.
- If you don’t have an entity – we can provide complete employee management support and supervision, in accordance with your specific needs.